The bear market of 2022 has knocked down stocks in many sectors. Even after the strong October returns, the S&P 500 index is still down nearly 19% year to date. The technology-focused Nasdaq Composite has fared even worse, with a 2022 loss of almost 30% through October. 

That makes it a great time for investors to decide if bargains can be had, and the growing electric vehicle (EV) sector is one place to consider. Tesla (TSLA 3.35%) and Ford (F 0.17%) are at different stages in supplying that nascent market, but both stocks are down about 35% this year. Investments in these names carry different risks, but the stocks' declines make now a good time to consider which looks like the better buy. 

interior view of Tesla Model S.

Image source: Tesla.

Can Ford catch Tesla? 

Ford isn't planning on going all-in with EVs, but it is still focusing on that segment right now. In its third-quarter conference call for investors, the company said it is now the "No. 2 electric brand in the U.S." Ford nearly tripled U.S. EV sales year over year in September and ended the quarter with more than 18,000 units sold. But there were more than 200,000 EVs sold domestically in the third quarter, according to Cox Automotive. So it's clear that Tesla still has a dominant position. 

But Ford plans to spend $50 billion to grow its Model e electric vehicle segment that now offers the F-150 Lightning, Mach-E, and E-Transit commercial vehicle. Ford will also complement its Model e division with its legacy internal combustion engine (ICE) vehicles as well as a third segment for commercial and government customers. The Ford Pro business will supply both work-ready ICE and hybrid electric products. It will report results from each segment separately beginning next year under the Ford+ corporate umbrella.

Tesla has complementary businesses as well, including autonomous driving technology, battery manufacturing, solar, and energy storage. That vertically integrated approach to its core EV business has led to strong profitability for Tesla, and that's what investors should be focusing on.

Profit margin differential

The third quarter provided a notable contrast between the two companies. Tesla reported $3.3 billion in both net income and free cash flow. That has brought its trailing-12-month net earnings to more than $11 billion. Ford, meanwhile, swung to a net loss in the quarter after it wrote off $2.7 billion in preparation to shut down Argo AI, the autonomous driving subsidiary in which it initially invested in 2017. Ford's move away from driverless vehicles is another contrast to the direction Tesla continues to pursue. 

That was a non-cash charge, however, and Ford still reported $3.6 billion in adjusted free cash flow for the quarterly period. It expects full-year free cash flow of up to $10 billion. But that cash won't give investors the same returns as Tesla due to the difference in operating margins

TSLA Operating Margin (TTM) Chart.

TSLA Operating Margin (TTM) data by YCharts.

What matters for investors

Two things should matter most for investors -- profitability and valuation. Those two metrics will largely determine investment returns. Tesla has proven it can be more profitable than traditional automakers. But valuation remains a concern for potential investors. The potential for its EV growth -- management expects 50% annual production growth for several more years -- and its energy and autonomous driving segments have sent shares soaring in recent years. 

Based on its cumulative earnings per share of $3.32 over the last four quarters, Tesla's price-to-earnings (P/E) ratio remains near 70. That means its stock could go nowhere for several more years as Tesla's business results catch up to the valuation. But for investors looking many years, or even decades, down the road, Tesla still looks to be a worthwhile investment.

While Ford's P/E appears low in the single digits, many questions remain. It makes more sense to own a proven, profitable, growing business than one in transition that may not provide returns on major investments that still need to be made.